Wednesday, March 18, 2009

BEIJING -- The World Bank cut its forecast for China's growth this year to 6.5%, below Beijing's target of around 8%, and cautioned that China should be prudent about expanding its stimulus this year as it may need to save its ammunition for 2010.

The bank now projects China's consumer price index, the country's key inflation gauge, will rise a mere 0.5% this year, compared with its previous forecast for a 2% increase.

The bank said February's CPI drop didn't necessarily signal "problematic" deflation, with core prices and wages, as well as output, declining in tandem, but cautioned that given the global economic weakness and potential overcapacity in China, "problematic deflation is a risk."

The bank lowered its forecast for China's GDP growth from its previous estimate of 7.5%, mostly due to the worsening global economy.

Government investment and consumption will help growth this year, it said. But policy makers can do more to spur private consumption and improve social programs to ensure that short-term growth targets don't undermine the work needed to rebalance the world's third-largest economy, the World Bank said.

Louis Kuijs, senior economist of the World Bank, said China's year-to-year economic growth will likely be weakest in the early part of 2009. Mr. Kuijs said declines in Chinese exports may have bottomed in February, but full-year exports will likely shrink significantly from last year. "Overall they remain very grim," he said.

Chinese exports in February fell 25.7% from a year earlier, down for the fourth month running and a sharper decline than in January.

Mr. Kuijs said it is not in China's interests to significantly depreciate the yuan as the country will not gain a lot in terms of exports by doing this. He said he doesn't expect China to move in this direction.

The bank said government-influenced direct expenditure will account for 4.9 percentage points of total GDP growth, the bank said.

The bank said China's fiscal deficit will rise to 3.2% of its GDP this year, a forecast slightly higher than the Chinese government's own estimate of nearly 3% due to the bank's lower GDP growth forecast.

Much of China's deficit is a result of the government's four trillion yuan (around $585 billion) infrastructure-focused stimulus plan, which was announced in November and will run through 2010.

The bank said that Beijing should be prudent about further expansion of its fiscal stimulus this year as it may need to widen its deficit in 2010 if the global slowdown isn't reversed.

Mr. Kuijs urged China to focus more on consumption-oriented fiscal spending and improve the domestic social safety net.

"Looking ahead, we think that there are limits to how much the government can beef up investment and infrastructure-oriented stimulus packages in the official manner," he said. "Given that China will continue to grow even in the very weak climate, it may make just as much sense to not go for the second or third general fiscal stimulus."

The bank's new overall growth rate estimate is below Beijing's target of around 8%, and down from last year's actual growth of 9%, which snapped five straight years of double-digit growth in China.

But the World Bank said that while the growth rate projected for this year is "significantly lower" than China's potential growth rate, this isn't likely to jeopardize China's economy or social stability.

"I don't want to be too gloomy. We do see the world economy recovering in the second half of 2009 and also a lot of strength in China's economy," said David Dollar, the World Bank's country director for China. "So, we see China as a relative bright spot in a rather gloomy global economic picture."

The World Bank estimated China's foreign-exchange reserves, the world's largest, will rise to $2.376 trillion by the end of this year, an increase of $425 billion. In 2008, the country's forex reserves rose by $420 billion.

It said China shouldn't worry about the slowing pace in the accumulation of foreign-exchange reserves and estimated China's current account surplus to rise to $425 billion this year, from an estimated $416 billion last year.